Equitable Life Guaranteed Annuity. Take the cash?

GrantV

I am fast approaching 65 and need to decide what option to take on a pension plan. This is with Equitable Life, but (luckily for me) it is one of their Guaranteed Annuity Plans.

If I take the full pension it is £720 per month, increasing 3% annually and with a 57% spouses pension. Or I could take £45k tax free cash which would reduce the initial monthly pension payment to £562 (i.e. 78% of the original).

Given that the full annuity (£720) has been guaranteed for 25 years, I am not sure what the "pension pot" is or how the tax-free cash and reduced monthly figures are calculated.

I know that I will have to pay 20% tax on the additional pension income if I take it, but is the annuity rate good enough that I am better off taking it? My IFA is not giving me a very strong lead on it - I get the impression he thinks there is not much in it and it depends on my attitude really.

It's always nice to have some spare cash, but it is not so urgently needed that I would want to forgo the extra pension if that was clearly a better deal. I could put some of it into my wife's and my own ISAs.

What would you do?

Linton

A quick calculation shows that it is marginal from a financial point of view after deducting 20% tax from the annuity. The advantage of the lump sum is flexibility and, if you were prepared to take some risk, you could probably get a better return than the annuity you gave up. On the other hand the extra annuity is guaranteed, surely for your and your spouse's lifetime rather than only 25 years.

GrantV

Thanks, Linton. What I meant by guaranteed for 25 years is that the size of the annuity has been guaranteed for the PAST 25 years(-ish) when an employer's scheme was closed down and the policy purchased on my behalf.

Therefore, since the full annuity is already set at that value (however much there is in "the pot"). I do not understand how Eq Life go about calculating the size of the maximum tax free cash sum or the reduced annuity amount.

Your assessment of the "take the cash / have the full annuity" question seems to confirm that it comes down to attitude rather than arithmetic.

kidmugsy

GrantV wrote: »

Your assessment of the "take the cash / have the full annuity" question seems to confirm that it comes down to attitude rather than arithmetic.

Up to a point: taking the larger annuity is equivalent to using the lump sum forgone to buy an escalating annuity at 4.2% p.a. You can almost certainly do far better by taking the lump sum and spending it down while you (and/or your wife?) suspends payment of your State Pension. That's equivalent to buying an annuity that pays 10.4% p.a. and is CPI-linked. So if you have no other urgent purpose for the lump sum but fancy a bigger income in retirement, that's a very attractive deal (so much so that the reward will be halved for new suspenders-of-pensions when the new State Pension rules are introduced).